IBM 2Q Financials

• 08/14/2000

Whether it’s a continuing sign of things to come or really just a case of product transition is a question that will not be answered for at least a couple of months. However, there is no denying IBM’s continued AS/400 business struggles.

On July 19, IBM announced its second quarter financial results for the period ending June 30. Although revenues declined one percent to $21.7 billion compared to the year-earlier period, IBM did manage to top analyst expectations, as its second quarter earnings per common share of $1.06 beat the consensus estimate of $1.00 per share. In the year-earlier period, earnings per share was $1.28. Overall, IBM’s second quarter net income totaled $1.9 billion compared to $2.4 billion in 1999.

In other IBM financial news, software revenues increased two percent to $3.2 billion. IBM Global Service grew two percent to $8.2 billion. IBM concluded the quarter with a total services customer backlog of approximately $75 billion. Also, revenues from Global Financing increased 10 percent to $819 million.

On the AS/400 front, the results were dismal, as AS/400 revenue declined for the sixth time in seven quarters. In a conference call announcing the results, IBM CFO John Joyce says AS/400 hardware results were down 23 percent compared to the second quarter of 1999. As a result, IBM’s hardware revenues fell five percent from last year to $9.2 billion.

The AS/400 was also the culprit behind the 10 percent decline of overall operating system revenues, with the decrease stemming mainly from a drop in AS/400 software revenues.

According to Joyce and IBM, the main reason for the poor AS/400 results was product transition. The AS/400 has been in the middle of a transition from Northstar to Pulsar and I-Star servers. In May, IBM announced a new line of high-end AS/400 servers, the 800 series, along with two new lower end servers, the model 250 and model 270.

Because its was well known in the AS/400 community that new servers were going to be hitting the stands, some companies put their buying plans on hold. The servers were introduced in May, but did not become available until July 28, and therefore, did not factor into the second quarter results.

The newest version of the AS/400’s operating system, OS/400 V4R5, was also introduced in May but did not begin shipping until July. As is the case with the new AS/400 servers, IBM is banking on the fact that customers held off buying OS/400 because they wanted to purchase the latest version.

Although IBM’s reasoning for the AS/400 revenue decline may have some merit, D.H. Andrews Group (Cheshire, Conn.) senior industry analyst Thomas M. Stockwell does not see it that way entirely.

“To have a 23 percent decrease in revenue is frightening,” Stockwell says. “I believe there are larger forces at work besides customers waiting for the new models. That might have been a factor, but it wasn’t the only reason for the decline.”

In particular, Stockwell pointed to IBM’s AS/400 marketing as a major reason for the decline. “IBM’s marketing campaign for the AS/400 has continued to be less than inspired,” he says. “What bothers me is that they don’t seem to be marketing towards attracting new customers.”

Looking ahead, Stockwell says the 23 percent revenue decline could be the beginning of big changes in the AS/400 market. “IBM can’t afford to have AS/400 hardware revenue down 23 percent and not reposition their server strategy. Personally, I believe they want to transition AS/400 customers to be more in line with their long-term server strategies. I think you’re going to start seeing a convergence of the RS/6000 and AS/400 servers into other platforms that IBM is going to push.”

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